Posts Tagged ‘alimony’

MAY 30, 2011 VOLUME 18 NUMBER 19
Periodically we try to answer some of our readers’ frequent questions, which we enjoy receiving. Some more recent questions and our quick attempts at simple answers follow. Remember, please, that slight variations in fact patterns can lead to different answers; these are intended as illustrations and guidance, not as iron-clad answers to your legal concerns. Please consult your lawyer (and we’d be interested in taking on that role, if you live in Arizona and would like to call and make an appointment) before relying on this information.

Can I leave my IRA account to a third-party special needs trust for my daughter?

Yes, you can. It may not be the best answer, and it may raise a number of other issues and concerns, so please talk to your lawyer about your specific situation. But one of your choices is indeed to leave the IRA (or a retirement plan of any kind) to your daughter’s special needs trust.

If a significant portion of your wealth is tied up in an IRA, 401(k), 403(b) or other tax-deferred retirement plan, there is plenty of information out there about how important it is to name individual beneficiaries, how the plan ought to be divided upon your death into shares for each beneficiary, and how your beneficiaries should be encouraged to “stretch out” their withdrawals as long as possible. We agree with all of that — but if one of your beneficiaries has a disability, and particularly if she is receiving Supplemental Security Income, Medicaid or other means-based public benefits, it is also important to create a special needs trust for that beneficiary. There is no reason her share of your IRA can not be made payable to that special needs trust.

The notion of naming a trust as beneficiary of a retirement account is fairly novel. Not too many years ago it was absolutely to be avoided, and many investment advisers, accountants, lawyers and financial companies retain that anti-trust bias deeply embedded in their collective and corporate psyches. But the rules are different now, and it is much easier to name a trust as beneficiary. You just need good advice from someone who is familiar with those rules and can explain how they affect your retirement account in your family situation.

In general terms, the primary effect of naming a trust as beneficiary will usually be that the age of the oldest person who might ever receive benefits from the trust will be used to calculate the withdrawal rate. But let’s see if we can make the explanation clearer. Let’s assume that your daughter, Diana, is 47. You also have two sons, Steven (age 54) and Scott (age 43). You have named Diana’s special needs trust as beneficiary of 1/3 of your IRA. Sadly, you die this year (we don’t mean anything personal — we have to let you die some time in order to ever figure out the effect of your beneficiary designations).

Next year Steven will have to withdraw at least 1/29.6 of his share of your IRA (we figure that as about 3.38%). Scott has to withdraw at least 1/39.8 of his share (that looks like about 2.51%). Diana would have to withdraw at least 1/36 (2.78%) if she had been named as beneficiary outright, but she wasn’t. So how much will her special needs trust have to withdraw?

It depends on who is named as remainder beneficiary. If upon Diana’s death the remaining money in the special needs trust goes to Scott and Steven, then we use Steven’s age for the calculation and the trust will have to withdraw the same 3.38% that he had to withdraw from his share. If Diana’s trust goes instead to her two sons (ages 15 and 17) then Diana herself is the oldest beneficiary and we can use her age — and the withdrawal will be 2.78%.

Clear as mud? Yes, but you should have seen the rules before they were simplified in 2002. While the numbers are daunting, the current rules are actually pretty easy to figure out, and the ability to stretch out distributions from your IRA for another 36 years (or so) allows Diana’s share to continue to grow tax-deferred, despite the need to put her share in trust.

Want more information, or the numbers for your own children’s ages? Look at the IRS’s Publication 590. Appendix C is Table I, the Single Life Expectancy table to be used by IRA (and 401(k), 403(b) and other) beneficiaries.

Assume husband and wife, married many years, were divorced five years ago. He was ordered to pay alimony of $1,000/month to her for the rest of her life. She has now gone into the nursing home, and has spent all of her own funds for her care. She has qualified for Arizona’s Long Term Care System (ALTCS — it’s Arizona’s version of the long-term care Medicaid program) payments toward her nursing home bills; she turns over her alimony payment and all but about $100/month of her Social Security, and ALTCS pays the balance of her nursing home bill.

If her ex-husband could legally stop paying the alimony payments, ALTCS would simply increase the payment to the nursing home by $1,000. She would be no worse off and he wouldn’t be subsidizing her nursing home care any more.

Because he is legally obligated to continue the alimony payments, however, ALTCS will continue to count them in its calculation of how much to pay to the nursing home. And if he went to court to argue “changed circumstances” and no continuing need to pay alimony, he might find that her attorney argues that the changed circumstances justify increasing the alimony payments so that she is not on ALTCS at all. Even if that didn’t happen, ALTCS might be inclined to view the proceeding as a sham just to get him out of paying the support payments. So it is far from certain that he would be better off by going back to the courts.

What about the reverse situation? Let’s imagine for a moment that it is the ex-husband who has gone into the nursing home. He has spent down all of his assets and applied for ALTCS. He receives $2,800/month in Social Security another $1,500 in private retirement; ALTCS says that he must turn over all but about $100/month of that income to the nursing home, and it will pick up the (small) difference.

Can he stop paying alimony? Well, no. The divorce court has ordered him to pay, and he needs to go back to argue “changed circumstances” as a way of getting out of having to make the payments. Will ALTCS, then, reduce his contribution requirement, recognizing that he is under a legal obligation to pay the alimony? Well, no. They say that his care comes first, and the entire income (minus his small personal needs allowance) has to go toward his care — and their payment to the nursing home will reflect that calculation.

What should he do? He needs to get legal help and get his support order modified. He should not simply ignore the outstanding alimony award.

Please note that “alimony” is not called that any more, and “divorce” is also an old-fashioned word. They are common in the vernacular, but the legal terms — at least in Arizona — are now “spousal maintenance” and “dissolution,” respectively. We know that, but we fear that it makes the explanation so much harder to read.

When someone in a nursing home qualifies for Medicaid, he or she will usually still have to pay a portion of the nursing home bill. In some cases this can mean that the resident must pay more than his or her income—or risk eviction from the nursing home.

Unmarried Medicaid recipients are expected to turn over nearly all their income to the nursing home. They are permitted to hold back a small amount monthly for personal needs (in Arizona the amount is currently $84.60). Premiums for Medicare Part B and other insurance coverage can also be withheld. Everything else usually must be paid to the nursing home.

Take Ervin Mulder, for example. The South Dakota man was receiving $701 per month from Social Security when he entered the nursing home. Medicaid officials ordered him to pay $671 to the nursing home each month (South Dakota only permits Medicaid beneficiaries to retain $30 for personal needs).

Mr. Mulder had gotten divorced a few years earlier, and his ex-wife had a court order directing him to pay $180 per month in alimony. In fact, that amount was being automatically deducted from his checking account each month as soon as the Social Security check arrived. Mr. Mulder simply could not pay $671 to the nursing home each month—he didn’t have it.

Mr. Mulder appealed the Medicaid agency’s determination, but the agency pointed to federal law and regulations. The federal government simply doesn’t provide for deduction of spousal support, for example, from the amount to be turned over. A trial judge ordered Mr. Mulder to pay the higher amount or face eviction from the nursing home.

South Dakota’s Supreme Court disagreed. In a 3-2 vote, the Justices decided that the Medicaid agency’s application of federal regulations was arbitrary and capricious. Mr. Mulder had no choice but to pay his ex-wife’s alimony, and he could not be required to pay the same money to both his wife and the nursing home.

The two dissenting Justices were unmoved. In their view, Mr. Mulder could go back to the state courts to reduce his alimony—though they did not suggest who might pay for those legal proceedings. If that didn’t work, they said, Mr. Mulder’s daughter should be required to come up with the $180 out of her pocket. Mulder v. South Dakota Department of Social Services, January 28, 2004.

Arizona rules are very similar to those in South Dakota. With no court case like Mr. Mulder’s, Arizona Medicaid (ALTCS) recipients are prevented from paying alimony or other debts. Although the result in Mr. Mulder’s case is (and we recognize the pun) appealing, it should not be relied on as precedent in other states.

It must be noted that the rules are different for married couples. A spouse living in the community can usually retain more of the nursing home resident’s income, with the precise amount varying in each case. The rules are also different—and considerably more complicated—for ALTCS recipients who reside in assisted living facilities, adult care homes or their own homes.

OCTOBER 14, 2002 VOLUME 10, NUMBER 15Walter and Geraldine Brown had filed for divorce before first Mr. Brown and then Mrs. Brown became incapacitated. When guardianship proceedings were initiated for both of them, the divorce proceeding was simply dismissed.

Mr. and Mrs. Brown lived in Indiana, where the language of guardianship is a little different from Arizona. What Arizonans would call a conservator is referred to as a “guardian of the estate” in Indiana. Two separate banks were appointed as guardians of Mr. and Mrs. Brown’s respective estates.

During the first months of the divorce action Mr. Brown had been ordered to pay spousal maintenance (better known as alimony) to his wife. After the dismissal of the divorce the bank handling Mrs. Brown’s estate asked the probate court to order the bank responsible for Mr. Brown’s estate to continue to make monthly payments. Mr. Brown was ordered to pay $1,600 per month to Mrs. Brown’s guardian.

Mr. Brown had been married before, and he had two sons from that marriage. Mrs. Brown had no children. Mr. Brown’s will left one-third of his personal property and a life estate in one-third of his real estate to his wife, and the balance of his estate to his two sons.

Mr. Brown died shortly after the spousal maintenance award was entered. His sons filed a probate proceeding, divided the estate in accordance with his will and began the process of closing the estate.

At that point Mrs. Brown’s guardian filed a claim against the estate for spousal maintenance that might be due for the rest of her life. After a hearing the probate court agreed and, considering Mrs. Brown’s life expectancy of 13.9 years, set the amount due from Mr. Brown’s estate at just over $160,000.

Mr. Brown’s sons appealed the judgment. Mrs. Brown’s guardian pointed out the Indiana statute (Arizona has a similar law) that allows child support payments to be reduced to a lump-sum claim against a deceased parent’s estate. In these circumstances, argued Mrs. Brown’s guardian, the court should make a similar calculation for spousal maintenance.

The Indiana Court of Appeals disagreed. In reversing the award the Court noted that there is no statute authorizing such a calculation for surviving spouses, and that the state legislature presumably could have created such a claim if legislators thought it necessary. Mrs. Brown’s spousal maintenance award, however, ended with her husband’s death. Estate of Brown v. Estate of Brown, October 2, 2002.

Although Arizona uses “conservator” rather than “guardian of the estate,” the laws of the two states are similar in other respects. The same result should be expected in Arizona, especially where no divorce proceedings have been finalized.